Stolt-Nielsen Limited

2021, we are streaming live from various lockdown locations. My name is Niels.

Good afternoon. Good morning.

Thank you for joining us for our Stolt-Nielsen’s First Quarter 2021 Earnings Release. My name is Niels Stolt-Nielsen.

I am the CEO of Stolt-Nielsen Limited. And together with me as always is Jens Grüner-Hegge, our CFO.

I would like to remind you that you can post questions at anytime during the presentation and you will find the question, I think up in the right-hand side of the screen and we will answer those questions at the end of the presentation. This presentation will also be recorded.

So, if we then can move to next slide and the next one. So the agenda, I will take you through the highlights of Stolt-Nielsen.

I will take you through our ESG reporting. I will take you through each of the businesses.

Jens will take you through the financials. And then we will open up for questions.

Thank you very much, Niels. Good afternoon and good morning to those of you in the United States.

I would like to remind you that we have today posted the earnings release, the interim financials as well as this presentation on the company’s website, which is www.stolt-nielsen.com. Also, as a reminder that the first quarter runs from December 1 of 2020 through February 28 of this year.

And finally, for those in U.S., our reporting is based on IFRS. Next slide, please.

Now, as Niels mentioned, the first quarter is typically our weakest, seasonally weakest quarter, particularly for tankers and tank containers and that’s driven by the winter weather that we have in the Northern Hemisphere, as well as the Christmas and Lunar New Year, Chinese New Year holidays. And consistent with that, we did see a drop in results this quarter compared with the same quarter 1 year ago, with operating profit before one-offs for the first quarter of ‘21 of $35.9 million and that compares with $58.1 million in the fourth quarter.

And Niels has gone through, talked about those in detail, so I won’t go into that. But if you compare it to the first quarter last year, where both quarters were equally impacted by the seasonality it’s worth noting that there is an improvement in operating profits before one-offs of $18.8 million.

That’s predominantly driven by the improvements in tankers where the prior year was marred by scheduling issues and the high bunker cost and where Stolt Sea Farm was impacted by the item of biomass, because the COVID-19 pandemic has just hit the market. Moving to the interest expense, this was marginally up from the fourth quarter, that’s driven by the increase in debt related to the acquisition of the 3 ships – the 3 CTG ships that we took on our balance sheet.

The FX gain of $1.2 million is partly related to FX paper hedges and partly due to translation adjustments. And also, as you will see, the income tax expense increased from $0.9 million in the fourth quarter to $2.2 million in the first quarter and that’s mainly reflecting the improved results in Stolt Sea Farm as well as in terminals due to the $12.4 million impairment that we took in the fourth quarter.

So consequently, that the net profits from our continuing operations came in at $2.5 million for the first quarter, that’s down from the $15.6 million in the prior quarter, but it’s up from a loss of $20.3 million in the first quarter of last year. So, a good improvement year-on-year.

EBITDA was $108 million, that was down from $128 million in the fourth quarter, but up from $100 million in the first quarter last year. And note that the EBITDA that we are showing here is before fair value of biological assets, insurance reimbursements, and other one-time non-cash items.

Next slide, please. This is a view of our balance sheet from a covenant perspective.

And I just want to remind that despite the recent acquisition of the 5 CTG ships, which we did because of a very advantageous price, we continue to focus on reducing debt and on maintaining a strong liquidity position. We have three main financial covenants in our loan agreements.

The one is debt to tangible net worth, where we need to maintain at no more than 2.25, so we should be below 2.25. EBITDA to interest expense should be at a minimum of 2.1 or above preferably.

And then there is a minimum tangible net worth of $600 million, where we are currently at $1.6 billion. So, we are well above that.

The EBITDA covenants are based on the EBITDA for the most recent four quarters, which you see in the bottom right quadrant, exceeded if you look at the yellow line, it exceeded $0.5 billion for the first time. And that’s quite exciting, although it was helped somewhat by IFRS 16.

If you look in the top left quadrant, you will see that we ended the quarter with gross debt at $2.58 billion. That is up from $2.50 billion, about $81 million increase and that’s related to capital expenditures of $115 million during the quarter.

The tangible net worth increased marginally by $2 million, so not much there other than it really reflects that net profit. And as a consequence, the debt to tangible net worth covenant increased from 1.53 in the prior quarter to 1.58 driven by this – the capital expenditures that we did.

I will talk more about the capital expenditures in detail on the next slide. But also note that in the first quarter, we paid an income dividend of $13.4 million, or I guess $0.25 per share.

If you look at the top right quadrant, you will see the EBITDA to interest expense ratio for the quarter that improved from 3.55 in the prior quarter to 3.69. And as this is an EBITDA driven covenant more than anything else, it’s driven by the improvement in our EBITDA very much because of weak first quarter 2020, dropped off, and we added a stronger first quarter ‘21 to that four-quarter view.

Our average interest rate was 4.6% in the first quarter. This is down from about 5.05%, the same quarter a year ago.

Now, interest rates have come down quite a bit in that same period, but we are currently fixed at about 80% of our debt and expect with the repayment of the bond that was done on March 18 to continue to see a reduction in that average interest rate. If you look at the bottom left quadrant, although it’s not a net – not a covenant, the net debt to EBITDA ratio is an important measure of our debt service capability that is increased slightly from 4.68 to 4.78 due to the added debt, as mentioned above, but our target remains to reduce this to below 4.

Next slide, please. Talking about capital expenditures, fourth quarter as a reminder, in the fourth quarter, we spent $20 million and that increased to $115 million this quarter.

And that’s driven predominantly by two things, of course, the CTG ships that we talked about a lot as well as contributions to Avenir, as you will see under Stolt-Nielsen Gas of $16 million, so between those two that’s been driving the most of the increase. There is also some additional expenditures for Stolthaven Terminals, some in Stolt Sea Farm related to the new farms and also in tank containers relating to depots.

Note, our debt to capital expenditures have shown here for tankers that excludes drydocking expenses and if you want to have an estimate of that drydocking expenses are typically around just shy of $20 million and so also estimated to be just below $20 million for 2021. For the full year ‘21, we expect to spend a further $136 million.

The increase really reflects a significant increase in terminals. This reflects expenditures that were postponed from 2020.

As you will recall, we will cut – we are cutting back significantly on capital expenditures and we are catching up on some of that now in 2020. And we are also adding some new projects including a jetty construction at Dagenham in the UK.

Next slide, please. If you look at the cash generated from operating activities was $94.4 million that was down from $120 million reflecting the underlying performance of the businesses.

You will also see that line below says interest paid was down significantly from the prior quarter. And that’s because some of our loan agreements we paid interest every 6 months, others will be paid quarterly.

So, you have every other quarter you will have a jump up in interest payments. If you go down and you see net cash generating by operating activities was there for $72 million this year, was slightly down from the prior quarter of $79 million.

Niels mentioned in the opening – when opening slides that our free cash flow was down about $100 million from the prior quarter and if you look at the capital expenditures line of $103.8 million, that was up from $24 million that explains the biggest part of it. And in addition, we had net investments in JVs and repayments of advances from JVs of about $13.9 million, as well as some purchase of Golar shares of 3 million and finally, also that we had some dividend payments.

And that were items that were impacting or causing the drop in the free cash flow. During the quarter, we raised $65 million of debt.

That’s long-term financing that’s secured by our Dagenham and Moerdijk terminal. We also drew down on a short-term bank loan of $20 million during the quarter.

And this has subsequently been repaid. And we repaid some $30 million on long-term debt and paid net lease payments of $10 million.

So that means net cash provided by our financing activities was $31.8 million. And that puts us at a net cash flow for the quarter, ending up at negative $14.7 million, resulting in cash and cash equivalents at the end of the quarter of $173 million.

And this comes on top of availability under our revolving credit line as of February 28, of $258 million, so in total about $431 million of available liquidity at quarter end and that was of course, because we had subsequent at quarter end, the repayment of the bond. And if you can move to the next slide, please.

You will see here that bond highlighted to $154 million. So, if you look at the overall maturity profile, we differentiate between what we consider regular principal payments, that’s the black box, you have the bond repayments, which are the light blue ones and then we have balloon payments, which are the gray ones.

And the bond that was repaid on March 18 of $154 million is now settled. It leaves us with 3 outstanding bonds, the next one being due in September of 2022.

So, we have about 18 months to go until that. And then we have the two bonds that we raised during 2020 and maturing in 2023 and 2024, but that also leaves us with only $153 million in regular principal payments for the remainder of the year.

So, it puts us in a good position. Now, subsequent to the quarter end, we also completed all the conditions precedent on a new $100 million revolving credit line that I mentioned in the previous earnings release.

So, this is now available to us. And that comes on top of the $431 million that I mentioned.

And also as Niels pointed out, we have closed on the financing relating to the 5 ships that we took over, where 2 of the ships have gone into NYK Stolt tankers, have been 100% financed in that joint venture on a non-recourse basis to Stolt-Nielsen and then the three steps that we took on our own balance sheet, we have financed with $77 million sale leaseback, very favorable terms on that one as well, long-term, very long-term profile. So, it’s a cash flow advantageous.

So with that, I would like to pass it back to you, Niels.

Thank you. I am just trying to turn on my camera.

Okay, here we go. I suggest the Stolt-Nielsen board has played its commitment to sustainability supporting enhanced ESG reporting with improved focus on tracking and reporting our KPIs.

Businesses are well positioned – all of our businesses are well positioned for the upturn that we expect that are coming. Stolt Tankers have taken the delivery of the secondhand ships, the 5 modern secondhand ships that we just bought in addition to our newbuilding program, Stolthaven Terminals has completed expansion program.

STC’s fleet has grown by 2,000 and it’s a very active market. And Sea Farm has doubled the sole farming capacity with two new recirculation facilities in Cervo, Spain and Tocha, Portugal.

And Jens showed you our balance sheet and liquidity position is strong and focus remains on debt reduction. So, that means that we will be going over to questions and I will be reading them and publish them.

First question is from anonymous. What is the purpose with Golar investment?

Is it a financial investment only? The reason behind the Golar investment is we wish to explore opportunities to apply our knowledge within logistics in ship terminals and containers and see if we can apply it to other segments.

And being able to join Golar and I am sitting on the Golar board, really has put us in a position to participate in what we believe is an area where we can apply our expertise within logistics. One of the products that came also out of this is the Avenir.

So, that is the purpose of that investment. Next question is also anonymous.

Could it be an option to sell Stolt Sea Farm division outright? No, I mean, I know, we have been asked many times what is this fish doing with the tankage terminals and tank containers, it’s been part of the company since 1973.

We have announced that we will consider separating it out, but through an IPO and that’s something that we are exploring, but it is our intention to be part of it in the long run. If there is one business that we are involved in, that has a huge growth potential, it is Stolt Sea Farm.

And I think we are good owners with the right mindset of long-term thinking and value development. Next question is from James East.

In tank containers, EBITDA issues have been blamed on higher transportation costs for at least seven quarters in a row, when will Stolt actually recover these higher expenses with higher rates or transportation clauses? So, the way it works is that you are now able to recover the transportation – the additional transportation costs on shipments that you have had.

But in your next shipment, you are able then to increase the cost. In some cases, we are also able to post the fixture pass on additional cost, additional that depends on the contract that you have.

So I would say that there will always be a lag and when the market is on its way up, so as long as the container, now it keeps on pushing the rates up, which they have been doing since the alliances were formed and since we’ve seen the pickup in their market, there will always be a lag, but we are passing these costs on as fast as we can. And there will be a lag of course when it comes down again I think we are living under extreme circumstances in that market right now.

So, I think we will see some sort of normalcy. But you will already see it now in the next quarter that we are able then to quickly or more rapidly be able to pass on these additional costs.

The reduction in EBITDA is not only for the additional transportation costs, but it’s also higher repositioning costs, which we have because of the quickly – the rapid change in demand and trading patterns we had in the last two quarters actually had quite a high repositioning cost. Next question comes from Anders at Danske Bank, what is the reason for the mentioned low utilization of the terminal in Singapore and why the suggested rapid improvement?

Well, the Singapore, it’s partly demand, partly supply. So Singapore, there was quite a bit of expansion going on in the market.

So, there was high supply, but also during the outbreak of the pandemic, there is also - the uncertainty has caused some customers to cancel their storage contracts. Now, what we are seeing now, so we have had the high utilization.

And the reason why I believe in a rapid improvement is that we are already now working on deals. We have closed deals additional business for our Singapore terminal, which will start, I think, in May.

So, I am quite certain that the - we know that utilization will go up because of the complex that we have one and we are also working on additional inquires. So I am quite certain that we will see the utilization go up in Singapore.

The second part of Anders’ question, COA renewals, are we at the end of the recent positive trend of increased rates compared to the last time or is the small increase in Q1 a one-off? The - as you know, we renew COAs every quarter.

And when the spot rates are on the pressure, of course, even though the long-term trend of supply demand is now in our favor, of course, if the spot rates are low, it has influence on the COA renewals. And also so that’s why I believe we are seeing – we saw a relatively low renewal increase in the first quarter.

We also took on additional COA business from a strategic customer, which we wanted to secure regardless, so we won large volume, which then was compromised slightly with – on the rates. So, I believe it’s one-off I think that as we see economic activity picking up with the stimulus, with the rollout of the vaccine, with the pent-up demand, I am quite bullish to believe that both the spot market and consequently the COA market will pickup significantly.

And the last, there is one further, will you add further container beyond what we saw in this quarter, in case, yes, about how many? As many of our competitors are listening in, I am not going to tell you how many containers we are going to order or lease, but we will continue to grow, especially with the high activity, we will continue to grow by acquiring or leasing tank containers.

This one is from Lukas Daul at ABG. Regarding tankers, your total volume carried were significantly down and STJ index dropped off significantly in Q1, can you provide some more color on the drivers behind these developments?

I think I mentioned this that the volumes carried were down in the first quarter, because COA volume was down and there was a slow stock market. One of the reasons that COA volumes were down is that, a big part of our business is acids forecasted to India, which is used as a fertilizer.

And every year, the Indians negotiate – the associations are in negotiation. So, volumes under those acid contracts were low, which has impacted our results.

So, I think that we are already now starting to see a pickup in COA volumes and nomination. So I am quite certain that this will, as I said earlier, continue as we see a market improvement.

Dag Holmstad ShippingWatch. What are your 2021 expectation for the tank pool collaboration with Essberger tankers, E&S Tankers, with John Essberger in terms of earnings and revenue?

It’s difficult to say. It depends on how the market develops.

But what we can say with certainty that there are significant operational savings, which we are very much focusing on delivering. So, on the operations savings side, we see as we go and the more we work together and work on driving out those synergies, we will see improvements from our earnings, from our SNIES fleet.

How the market will develop is difficult to say, but it started off quite nicely. Next one is Jonas Shum at Swedbank, you have now completed several initiatives to renew the tanker fleet.

When do you believe you will need to engage in a newbuilding program? Well, a shipping company that’s the biggest investment decision that they do and it’s the toughest one.

So, we have grown our fleet by three acquisitions through newbuildings and through secondhand acquisitions. So, we are very well positioned as we are.

I am not worried about the age profile of our fleet. I think that actually could be advantageous at this at this stage.

So, we are well positioned for a market recovery. But of course as an industrial shipping company, we need to continuously renew our feet.

So yes, we will always look at – we will always have a new building program. The time that we are spending now is to consider the various propulsion systems that we will use when we order nexus of newbuilding, if it’s now or in the future, that’s really where we are focusing.

And the realistic alternatives that we see right now is it’s the conventional engines that we are currently using of course with the fuel efficient and whole design and new engines etcetera, but the other alternative that is really only available right now is the dual fuel LNG. And then you can – we are involved in methanol project and ammonia project and hydrogen project, but it’s not there yet.

So, but we are part of various study groups and are closely involved. But as it stands right now, we do not have the newbuilding order as attached.

at Kepler, in March and the start of April, the chemical tanker spot price looks to have flattened out or even increase some of our crude and product tanker rates are still very weak, how do you expect chemical spot rates to develop in the shorter term? It’s tough to say, but again the – remember, we are focusing on COAs, we are focusing on partial business, the smaller end of the partial size.

And on the supply demand side there, it’s in our favor and it’s about time, because we have had a horrible market the last I may say 20 years. So, I think our time is coming.

So, short-term, it’s difficult to predict, we have secured our COAs, we are fairly confident of we have this 70% contract portfolio. What we have done is that we have unless it’s strategic or unless it’s already a high paying business, we have kind of – we are limiting the duration of the COAs that we are willing to commit to, because we know that the market is going to improve so that we are for us, because we have 70% contract, it is when the market turns, yes, we have the 30% of full capability.

We will be able to capture the market right away with that capacity. But it will take time to – we renew contracts every month, every quarter.

So, once the market recovers, it will take time for that to be negotiated into our contract portfolio. So, the balance is should we change the 70:30 relation – ratio, but short-term spot rates, when it comes, it will come quickly.

If it’s in the second quarter or the third quarter, it’s difficult to say, but I feel very confident it will be coming soon. And then that was the on the last question that we have so far is from Eric Olsen, terminal CapEx increase, can you elaborate a little on how much of that is maintenance CapEx put on hold last year and how much is for new jetty etcetera or expansion?

Jens, maybe you can help me on that one? How much of the capital expenditure that we did in this first quarter was maintenance and how much was expansion?

Yes. Now, that we have completed the New Orleans expansion $16 million, that really completes the expansion program that we have ongoing.

So, going forward, what we have is as I mentioned, the upgrading of the jetty at one of our Dagenham facilities, that is regular maintenance and repairs and it is also modernizing the terminals that we have, which is a continuous process. If you want to look at the full CapEx for the year, about two-thirds of that amount relates to maintenance and modernization if you like?

We are spending a lot of resources on modernizing and automating our terminals as we have talked about earlier.

Thank you very much. Unless there is anybody that will be sending in additional questions I can’t see any.

That completes our earnings presentation. Hopefully next time we will meet in person.

If not, we will see you again on the videoconference. Thank you for participating in our first quarter 2021 earnings release.

Thank you.